Overpaying Mortgage

Hi all,

Took a 30 year mortgage out to get lower payments as I was planning to do overpayments anyway to reduce the term. The plan is to be mortgage free in 14 years (I'll be 42) which I believe is achievable.

Looking at my agreement, it says the following:

You can repay this mortgage early. If you repay part or all of the loan an early repayment charge will be payable at the time of

repayment, calculated as a percentage of the amount of the loan repaid. The percentages are set out in the table below along

with cash examples:

3% of the amount repaid

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So am I right in thinking that if I pay off £5000, I will pay £150 in fees? But I'd save not having to pay interest on that £5000 over the term anyway, right?

It's only a 2 year fix that I'm on, so I'm more likely to slap down some more money at the end and not have an early repayment fee, which I'm guessing makes the most sense?

Am I right in thinking that putting down money after my fix, before I choose another product or jump to another mortgage company, it would reduce the monthly amount we pay instead of reducing the term? So we'd still be on a 30 year term but may be paying £100 less per month for instance, meaning that over the course of the year, I'd have another £1200 in our pockets, which could be put down as another overpayment when that deal ends etc...?

Hopefully that all makes sense. I think I have it right, but some kind of confirmation would be appreciated.

Lastly, is overpaying your mortgage still the done thing to do? It's the only debt that we have other than a 0% credit card, so it's the only debt we have that costs us more than what we've actually spent.

Thanks,

Andy

Normally there will be a limit to how much you can overpay without charge.

For example, our mortgage allows us to overpay up to 10% of the original loan amount per year without fees.

Indeed, ours waives any charges as long as the total overpayment during a year is below 10% of the outstanding balance as of 1st January of that year.

If you're overpaying to reduce the term then your monthly repayments will stay the same i.e. if you pay £500 a month your mortgage is set to finish in September 2046, after paying off £5k to reduce the term you'll still pay £500 a month but your mortgage would finish in December 2045 (for example).

If you overpaid to reduce your capital debt then your mortgage may go down to e.g. £485 a month but you'll still pay off the mortgage in September 2046.

Best off talking to your lender and get them to do the calculations for you and make the decision accordingly.

Our mortgage offer shows the following:

If you only have 2 year fixed term I would save up as much as possible for when the term ends and when choosing another product pay of the amount you saved up, should also get you a better LTV interest rate.

I changed to to a tracker (no fixed term as I only have 7 years left) that allows me to overpay as much as I want for the remaining duration of the morgage.

With our provider, we can choose what our overpayments do - either reduce the term (which ours is currently set to) or lower the monthly repayments.

I would check what the overpayment 'rules' are with your provider. I forget ours exactly but our payments + overpayments must be under something like 10% of the mortgage value before we're charged any fees. I don't think it matters if you do a monthly overpayment or lump sum (haven't checked ours as we do it monthly).

Overpaying saves a lot of cash - overpaying by £100 a month over the term shaves off 5 years of ours and saves around £18k in interest! Currently overpaying by a lot more than that while we have spare cash not doing anything else. We also have an option to take out cash which we've overpaid but I'm not entirely sure how that works.

Maundie said:

If you only have 2 year fixed term I would save up as much as possible for when the term ends and when choosing another product pay of the amount you saved up, should also get you a better LTV interest rate.

Click to expand...

Assuming no overpayment charges, this only makes sense if the interest rate on your savings is greater than that of your mortgage.

For our mortage we can overpay any value.

Our only charge is 3 months interest on the month when we we make the payment.

We did it last Jan and shaved 2.5K of interest off the loan. Much better than having it in the bank.

I think the only limitation on my mortgage is max of 10k in a single payment.

I have made two payments of 10k in the last 6 years or so. The plan is to pay it off in the next few years and then buy something bigger with the Mrs.

Out of interest who is your provider?

From the limited terms you have posted above it makes it sound like overpaying is chargeable (except they only mention lump sums not monthly amounts), and further to this you have to call and ask for the payment to be allocated to capital every time you make the payment. This is quite quality service from the provider.

While 10% of the outstanding balance from the start of the year is relatively standard.

You always have the option of calling your lender and asking to reduce the term so that they payment matches the amount you currently pay + the amount you are happy over paying (this is what I did to get around the fiasco of having to call up each month to allocate overpayments to capital rather than an overpayment pot). A change to your product like this should be free, or at worst an admin fee (£25).

Ok, did the simple thing and called them. There are 3% fees, so they agreed I'd be best to slap down some money once the product ended.

Due to me being self employed, I had to go with a non-highstreet lender and they've just said, they currently have no retention products available, but hopefully when my 2 year fix ends in April 2018, there should be something for me. If not, I go onto the much higher variable rate.

Obviously, I'd rather not do this as it means I'll be paying a bucket load more interest so would probably look to jump ship.

The only issue with that is that I take a modest yearly salary including dividends, but to get the mortgage, I increased my dividend to get the mortgage that I needed. If I jumped ship to another mortgage provider, am I right in thinking that I'd have to increase my dividends again for the next 2 years leading up to it and to prove my income all over again?

For instance:

£30,000 a year but to get the mortgage I had to increase my dividend meaning that for that year I had to pay myself £50,000 for the year.

I've now dropped back down to £30,000 a year again.

If I jump ship when I'm due to change products, Will I have to pay myself a larger dividend again to bring my income up to show affordability again, as I'm not overly keen doing that due to dividend tax rates changing etc... and I live comfortably on the smaller amount, and don't want to pay myself another £20,000 just to prove my affordability.

Sorry for the n00b questions, but first mortgage

Andy

Also, they confirmed that I can choose if it comes off of the capital or reduces the term.

Andy

You definitely need some professional advice.

Yes I'm afraid OCUK can't help better speaking to your accountant or a IFA.

Spoke to my broker, she confirmed I'd have to prove all of my income again to jump ship, which sucks.

Staying with the same lender, hopefully they have a good retention product by the time my fix ends. They currently don't, so hopefully that changes.

Out of interest, is there anyway to work out overpayments.

Say for instance, the variable rate is 5% at the time, but being on a variable, I can do overpayments whenever I like, I'd never actually be paying 5% of the total would I?

Thanks,

Andy

Aruffell said:

Ok, did the simple thing and called them. There are 3% fees, so they agreed I'd be best to slap down some money once the product ended.

Due to me being self employed, I had to go with a non-highstreet lender and they've just said, they currently have no retention products available, but hopefully when my 2 year fix ends in April 2018, there should be something for me. If not, I go onto the much higher variable rate.

Obviously, I'd rather not do this as it means I'll be paying a bucket load more interest so would probably look to jump ship.

The only issue with that is that I take a modest yearly salary including dividends, but to get the mortgage, I increased my dividend to get the mortgage that I needed. If I jumped ship to another mortgage provider, am I right in thinking that I'd have to increase my dividends again for the next 2 years leading up to it and to prove my income all over again?

For instance:

£30,000 a year but to get the mortgage I had to increase my dividend meaning that for that year I had to pay myself £50,000 for the year.

I've now dropped back down to £30,000 a year again.

If I jump ship when I'm due to change products, Will I have to pay myself a larger dividend again to bring my income up to show affordability again, as I'm not overly keen doing that due to dividend tax rates changing etc... and I live comfortably on the smaller amount, and don't want to pay myself another £20,000 just to prove my affordability.

Sorry for the n00b questions, but first mortgage

Andy

Click to expand...

Future mortgage applications will go through usual affordability calculations. If you are want to be more comfortable with being able to pass affordability calculations then you would need to show higher earnings through increasing your pay, be that dividend increases or increasing your pay some other way.

While it's less tax friendly it could save you more money in the long run if it guarantees you a better product.

Also consider taking the pain of increased dividends, putting the extra money in to a pot to pay off a lump sum when you do re-mortgage, and the hit again is relatively less than if you just go about spending the extra.

Aruffell said:

Also, they confirmed that I can choose if it comes off of the capital or reduces the term.
Andy

Click to expand...

Effectively one and the same thing if you keep balancing the overpayment amount and the repayment amount so your total payment amount is the same.

Pre allocation of over payment amount:
Monthly payment £500
over payment savings pot £500
total payment £1000

Post allocation of over payment amount (to term):
Monthly payment amount £500
over payment savings pot £500
total payment £1000

Post allocation of over payment amount (to capital):
Monthly payment amount £400
over payment savings pot £600
total payment £1000

It only makes a difference if you are trying to pay off the loan earlier or make your monthly commitment less strenuous.

Check out this very useful tool for assessing the impact of overpayments:

https://www.drcalculator.com/mortgage/uk/

joeyjojo said:

You definitely need some professional advice.

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Not so, the information is straight forward to follow. Mortgages are not black magic. While professional advice will help, the outlaying of options to the OP does not require it, nor the answering of relatively simple questions.

Could be wrong, but arent most 'early repayment charges' applicable only during the fixed term? I.e. if you take a £250K mortgage over 30 years, with 5 years fixed at 3.2%, if you repay the mortage within that fixed period you are liable for a charge.

gobbo said:

Normally there will be a limit to how much you can overpay without charge.

For example, our mortgage allows us to overpay up to 10% of the original loan amount per year without fees.

Click to expand...

Same with mine, there will certainly be a limit of how much you can repay.

Im nationwide

10 year fixed, quite hefty but declining overpayment penalties for first 10 years (same as fixed timescale)
However I am allowed to overpay 10% of the original loan amount annually with no fee.

Currently I am investing the amount I would overpay and getting returns that almost match the rate I am paying on the mortgage. (with a little risk). Once I have an amount of liquidity I am happy with (plan is 12 months bills plus the amounts I have on 0% CCards) then I will make overpayments in lumps every so often.